52.242-3 Penalties for Unallowable Costs
Source: FAR 52.242-3 on acquisition.gov
Do not include expressly or previously determined unallowable costs in indirect cost or final pricing proposals—doing so can trigger repayment obligations, interest, and penalties up to double the disallowed amount.
Overview
- FAR 52.242-3, Penalties for Unallowable Costs, requires contractors to exclude unallowable indirect costs from certain cost proposals and warns that penalties apply when they do not.
- The clause is aimed at protecting the Government from paying costs that are prohibited under FAR cost principles or agency supplements.
Key Rules
- Definition of Proposal
- A "proposal" includes a final indirect cost rate proposal submitted after the contractor’s fiscal year for costs tied to billing rates or final price negotiations, and the final statement of incurred and estimated costs under an incentive price revision clause when used to set final contract price.
- Prohibition on Including Unallowable Costs
- Contractors must not include any cost that is unallowable under FAR Subpart 2.1, applicable FAR cost principles, or executive agency supplements.
- Penalty for Expressly Unallowable Costs
- If the contracting officer finds a cost is expressly unallowable, the contractor owes a penalty equal to the disallowed cost allocated to the contract plus simple interest on any overpayment, using Treasury-prescribed rates.
- Penalty for Previously Determined Unallowable Costs
- If the proposal includes a cost previously determined unallowable for that contractor, the penalty is two times the amount of the disallowed cost allocated to the contract.
- Finality, Waiver, and Repayment
- Penalty determinations are final decisions under the Contract Disputes statute. The contracting officer may waive penalties under FAR 42.709-6 criteria, but paying a penalty does not repay the Government for the underlying unallowable cost.
Responsibilities
- Contracting Officers: determine whether submitted costs are expressly or previously determined unallowable, assess penalties and interest, and consider waiver criteria under FAR 42.709-6.
- Contractors: screen proposals carefully, remove unallowable costs before submission, and repay any disallowed amounts separately from penalties.
- Agencies: enforce statutory penalty requirements under 10 U.S.C. 3748 or 41 U.S.C. chapter 43 through FAR 42.709.
Practical Implications
- This clause exists to deter contractors from shifting prohibited costs to the Government through indirect rate or final pricing submissions.
- In practice, contractors need strong internal cost allowability reviews, especially for indirect cost rate proposals and incentive contract closeout submissions.
- A common pitfall is assuming that removing a questioned cost later avoids consequences; if the cost was included and found expressly or previously unallowable, penalties and interest may still apply.
As prescribed in 42.709-7, use the following clause:
Penalties for Unallowable Costs (Dec 2022)
(a) Definition.
Proposal, as used in this clause, means either—
(1) A final indirect cost rate proposal submitted by the Contractor after the expiration of its fiscal year which-
(i) Relates to any payment made on the basis of billing rates; or
(ii) Will be used in negotiating the final contract price; or
(2) The final statement of costs incurred and estimated to be incurred under the Incentive Price Revision clause (if applicable), which is used to establish the final contract price.
(b) Contractors which include unallowable indirect costs in a proposal may be subject to penalties. The penalties are prescribed in https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title10-section3748&num=0&edition=prelim" target="_blank">10 U.S.C. 3748 or http://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title41-chapter43&saved=%7CZ3JhbnVsZWlkOlVTQy1wcmVsaW0tdGl0bGU0MC1jaGFwdGVyMzctZnJvbnQ%3D%7C%7C%7C0%7Cfalse%7Cprelim&edition=prelim" target="_blank">41 U.S.C. chapter 43, as applicable, which is implemented in Section 42.709 of the Federal Acquisition Regulation (FAR).
(c) The Contractor shall not include in any proposal any cost that is unallowable, as defined in subpart 2.1 of the FAR, or an executive agency supplement to the FAR.
(d) If the Contracting Officer determines that a cost submitted by the Contractor in its proposal is expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs, the Contractor shall be assessed a penalty equal to–
(1) The amount of the disallowed cost allocated to this contract; plus
(2) Simple interest, to be computed-
(i) On the amount the Contractor was paid (whether as a progress or billing payment) in excess of the amount to which the Contractor was entitled; and
(ii) Using the applicable rate effective for each six-month interval prescribed by the Secretary of the Treasury pursuant to Pub.L.92-41 (85 Stat.97).
(e) If the Contracting Officer determines that a cost submitted by the Contractor in its proposal includes a cost previously determined to be unallowable for that Contractor, then the Contractor will be assessed a penalty in an amount equal to two times the amount of the disallowed cost allocated to this contract.
(f) Determinations under paragraphs (d) and (e) of this clause are final decisions within the meaning of 41 U.S.C. chapter 71, Contract Disputes.
(g) Pursuant to the criteria in FAR 42.709-6, the Contracting Officer may waive the penalties in paragraph (d) or (e) of this clause.
(h) Payment by the Contractor of any penalty assessed under this clause does not constitute repayment to the Government of any unallowable cost which has been paid by the Government to the Contractor.
(End of clause)